Hedging 101:
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SP all good. Up 2 cents. Not sure what all the fuss was about
Delving into the technical here and hedge accounting on the outer periphery of complex but was only a matter of time this became topical given the gain they recognised in FY22
Loads of companies hedge various aspects of their business. Exporters hedging through currency contracts, corporates with high debt burdens hedging their interest rate expense (ie fix it), banks doing the same on their borrowing costs. All normal stuff and this an "economic hedge" of what they are trying to achieve. An agri exporter might fix a big chunk of currency exposure based on some BOE estimate of what they expect their foreign currency receipts might be over some future period. And the fx contract on their book may flop about / ie be revalued again and again (threading through the P&L) until it is exercised when it is used.
But for a bank they are often hedging for a specific contract - say the money they borrowed to write a loan - where they know the exact principal and duration. Hedge accounting seeks to do away with that "flopping about" in the FMV of the interest rate contract by pairing both the underlying activity and the hedged contract. It takes out a lot of the volatility. In order for a hedged exposure to qualify for hedge accounting there are a few hurdles the company has to jump through, mainly: the purpose of the hedge and corresponding activity (in this case heartlands borrowing) have to be explicitly documented at the time the hedge is taken out so the accounting between the two can be paired going forward, going forward the hedge needs to work more or less as documented (ie if you did some new fancy exotic hedging that didnt work the way you thought it couldn't continue to be hedge accounted).
Heartland have been hedge accounting for some time. Last year they derecoginised (or in their terms de-designated) some swaps from hedge accounting. I understood from the conference call these related to swaps paired again borrowing to fund their premium saver products. I do not recall why they were de designated. If I had to guess - it would be that the hedging was over too broad a category and not specifically granular to link it to individual activities. But there could be other reasons. I am not sure but its possible HGH could voluntarily even withdraw specific contracts from hedge accounting. More on that below.
The net impact of this was a $16.7m gain - which was effectively a pull forward of the profits that would have been recognised in the normal course of business over the next 3 years. A cynic could wonder if the de-registration that resulted in this gain was implemented to augment statutory npat for FY22, given all that was going on. In that respect useful to remember the de-designation was for a handful of swaps relating to saver products which I can think of a technical reason for why they weren't included. The other thing is for HGH's presentation of their underlying financial results they took the gain out for underlying purposes.
The note this morning I thought was both cryptic and awfully specific around the $6.6m impact of hedge accounting. In the conference call they talked to the FY22 de-designation pulling forward 3 years of interest rate related net impact from those contracts - I wonder if the $6.6m is simply the corresponding amount for year 1. I also wonder if when they released their guidance perhaps they did it on the basis those hedges were still in place. Or rather because certain contracts had been hedge accounted there is an accounting requirement in subsequent periods to show the the income that would have been if they had been left in place, but as a negative adjustment. Or some variation of this accounting adjustment - its way above my pay grade.
It's pretty fuzzy. HGH have tried to keep a technical issue succinct but a few questions left.
and ultimately having to qualify guidance issued only a month or so earlier is never desirable.
Thank you for sharing your wisdom. I had to read your post twice to fully absorb it! Sorry i cant give you a rep for it i need to share it around.
This hedge accounting has never been an issue in the past... Like you say never was discussed on here.
https://www.investopedia.com/terms/h...accounting.asp good old investopedia explanation for anyone wanting to expand their knowledge on hedge accounting as i have done this morning.
went and had a peruse of the annual report released a few weeks ago . blurb on why the swaps were de-designated
"A $16.7m gain was recognised in relation to derivatives that were de-designated from hedge accounting relationships. Heartland's hedging strategy was economically very effective throughout FY22, with interest rate swaps utilised to hedge fixed lending with tenors greater than 12 months to 3 month bank bill reference rates, thus limiting volatility to future interest rate changes. However, 3 month BKBMs ceased to be an identifiable risk for hedging relationships during FY22. This resulted in balances held in the Cash Flow Hedge Reserve against these hedge relationships having to be released to the profit and loss for the 30 June 2022 period."
just goes to show you the havoc ever changing accounting treatments have in understanding financial results. Think I understand it but is a moot point - its more what the accounting entries are going forward that matters - but anyway HGH and the analysts will just chuck it below operating earnings anyway.
Global Dairy Prices down overnight ...been trending down since March with a couple of up periods in May and September
Could mean HGH share price could drift down a bit more --- tends to follow dairy prices with a bit of a lag
If the rates actually reach where market is expecting it ie 5.5% or more and stay there longer then surely deep recession on the cards second half 2023 ...if that theme catches traction then that will be bigger worry for HGH SP then just dairy prices trending down ...what do u think mate ?
Dropping dairy prices could be signalling his deeprecession you talk about
Three main economic drivers in NZ are the 3Cs -- Currency, Commodity prices and Climate -- put those into a model and you get a pretty good feel for where theeconomy is going
Currency OK, Commodity prices still relativity high and SMD not a problem
As long as the grass stays green and producers getting good prices we'll be OK for a while
The global dairy trade (GDT) index slumped by 4.6% overnight, with whole milk powder (WMP) falling 4.2% and skim milk powder dragging even further behind, dropping by 6.9%.
ASB’s Nathaniel Keal had one word in mind when summing up the GDT update: soggy.
“We’ve had a pretty soggy GDT overnight,” he wrote in an ASB rural economic report this afternoon.
He said the upward slope of the contract curve didn’t point to prices falling away “dramatically” but prices had lost part of the upward force they’d tentatively shown at the start of spring.
“Over the medium term, we just don’t think there will be enough supply to meet demand, and that should be a boon for dairy prices,” he said.
“Add a very weak New Zealand dollar into the mix and it’s a positive outlook for farmgate returns.”
Market stills seems to hate the cap raise in August, look what happened compared to the large listed banks around the same time; they're powering ahead and HGH is still getting a hammering
HGH
20/10/2022 09:54
TRANSACT
PRICE SENSITIVE
REL: 0954 HRS Heartland Group Holdings Limited
TRANSACT: HGH: Heartland to purchase Challenger Bank in Australia
NZX/ASX release
20 October 2022
Heartland to purchase Challenger Bank in Australia, and provides lending
growth update
Entry into acquisition documentation for Challenger Bank
Heartland Group Holdings Limited (Heartland) (NZX/ASX: HGH) is pleased to
announce that it has signed a conditional share purchase agreement for the
purchase of Challenger Bank Limited (Challenger Bank) from Challenger Limited
(ASX: CGF). The share purchase agreement is subject to obtaining the
requisite regulatory approvals.
Based in Melbourne, Australia, Challenger Bank is an established authorised
deposit-taking institution (ADI) which offers customers a range of savings
and lending products. Challenger Bank's products include
government-guaranteed retail term deposits and home loans - its system is
also capable of Reverse Mortgage origination. As at 30 June 2022, Challenger
Bank had A$89 million of retail lending, A$17 million of corporate lending
and A$228 million of deposits.
Subject to completion, Heartland's existing Reverse Mortgage and Livestock
businesses in Australia will be transferred to sit in or under Challenger
Bank. The opportunity to grow these existing businesses in Australia either
as part of a bank or a broader banking group is significant. Challenger Bank
also affords further opportunities to expand Heartland's best or only
products into Australia.
For regulatory reasons, Heartland will be required to hold Challenger Bank
through an Australian incorporated non-operating holding company (NOHC) which
is approved and regulated by the Australian Prudential Regulatory Authority
(APRA). It is anticipated that Heartland's top-level holding company in
Australia, Heartland Australia Holdings Pty Limited (HAH), would be the
appropriate vehicle to apply to APRA for authority to act as a NOHC.
Heartland continues to engage with the Reserve Bank of New Zealand (RBNZ) to
obtain consent for HAH to also act as the NOHC of Heartland Bank Limited in
New Zealand. Completion of the transaction is also conditional upon consent
under the Financial Sector (Shareholdings) Act.
The consideration payable by Heartland on completion is expected to be
approximately A$36 million, subject to adjustments for net assets delivered
at completion. Heartland's intention is to cover the costs of the acquisition
through existing resources.
Strategic rationale
Heartland's strategic objective for expansion in Australia requires the
establishment or acquisition of an ADI. Becoming a bank through an ADI in
Australia would make possible a number of benefits:
o access to a deep and efficient pool of funding to support ongoing growth;
o potential uplift in margin, to the extent that retail funding rates are
less than wholesale rates; and
o providing a platform to extend Heartland's best or only strategy into
Australia.
The aim is to create a digital bank which, once Heartland assets are
transferred to it, will be profitable. This, together with Heartland's best
or only strategy, provides the opportunity for a differentiated proposition.
On 23 August 2022, Heartland announced it had entered into a non-binding
memorandum of understanding with Avenue Hold Limited (Avenue Hold) for the
potential acquisition of Avenue Hold and Avenue Bank Limited (Avenue Bank), a
restricted ADI. Following that announcement, Heartland continued due
diligence and negotiation of binding transaction documentation with Avenue
Hold.
Since then, market conditions have changed. Heartland also became aware of
Challenger Bank as an alternative opportunity. Heartland Board's assessment
is that Challenger Bank is a stronger acquisition opportunity for Heartland's
execution of its strategic objective for growth in Australia as it offers a
full ADI licence. Challenger Bank has also recently undertaken a programme of
significant investment to build out its digital capability, which fits with
Heartland's digitalisation strategy.
Heartland has accordingly advised Avenue Hold that it will no longer be
exploring the potential acquisition opportunity previously disclosed, and has
discontinued due diligence and negotiations. Heartland made an initial
subscription for A$5 million of capital (circa 11%) in Avenue Hold. No
decision has been made on the future of this shareholding. For accounting
purposes, this investment is classified as fair value through other
comprehensive income, with any change in value not impacting Heartland's net
profit after tax.
Heartland was advised by Corrs Chambers Westgarth, Deloitte and Jarden in
relation to the acquisition.
Business update
The first quarter of the financial year ending 30 June 2023 (1Q2023) has seen
growth across key lending portfolios of Reverse Mortgages, Motor and Asset
Finance.
Reverse Mortgages in both New Zealand and Australia maintained strong growth
momentum, recording 24.4% and 19.3% annualised growth in 1Q2023 respectively.
The Motor portfolio is starting to return to growth levels seen before the
New Zealand Credit Contracts and Consumer Finance Act 2003 and the Credit
Contracts and Consumer Finance Regulations 2004 (CCCFA) were amended with
effect from 1 December 2021, recording 7.8% annualised growth in 1Q2023.
Asset Finance recorded annualised growth of 10.3% in 1Q2023.
Other areas are performing satisfactorily, noting that the Livestock lending
season has only just commenced.
- ENDS -
so there buying a loss making business lol
hope it works out